GAURAV RAJESH DESAI ,MUMBAI vs. ITO WARD -3(2), MUMBAI

The learned CIT(A) erred in upholding the addition made by the AO by applying the provision of sec. 56(2)(vii)(b) of the Act and thereby making addition of Rs. 50,96,667/- without appreciating that the land was a lease land therefore not subjected to provision of sec 56(2)(vii)(b) of the Act.

The Id CIT(A) erred in applying the valuation report of the DVO for arriving at the market value of the immovable property as on date of registration, without appreciating that the Id DVO has failed to refer the nature and character of land correctly in the report, thereby arriving at incorrect valuation.

The Id CIT(A) failed to appreciate that the AO wrongly applied the valuation rate as on date of registration i.e 28/8/2014 whereas the land in questions was initially purchased on 14-09-2013 by payment of cheque of Rs. 10,00,000/-.

The Ld. CIT(A) – (NFAC) erred in not providing proper & effective opportunity of hearing before deciding the matter.

The assessee is an individual and filed the return of income for AY 2015-16 on 31.10.2015 declaring a total income of Rs. 2,57,150/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. During the year under consideration the assessee along with two other persons purchased a piece of land admeasuring 5060 sq.mtr at Kalyan for a consideration of Rs. 1,00,00,000/- vide document registered on 28.08.2014. The AO called on the assessee to furnish details pertaining to the acquisition of the property. The assessee in response filed the relevant documentary evidences explaining the source of funds for purchase of the property. The AO subsequently issued a show cause notice asking the assessee as why addition under section 56(2)(vii)(b) cannot be invoked in assessee's case considering that the market value of the said property is at Rs. 6,87,49,000/-. The assessee vide letter dated 30.11.2017 disputed the valuation considered by the AO and requested for reference the case to the Departmental Valuation Officer (DVO). The assessee filed various details before the DVO including the documents evidencing that the property is a leasehold land and is under dispute. The DVO determined the value of the property at Rs. 2,52,19,000/-. The AO accordingly made an addition under section 56(2)(vii)(b) of the Act for an amount of Rs. 50,96,667/- being assessee's share of the difference between purchase consideration and the valuation as per DVO. Aggrieved the assessee filed further appeal before the CIT(A). The assessee before the CIT(A) the assessee raised three contentions (i) that the provisions of section 56(2)(vii)(b) of the Act cannot be applied on a lease land

The CIT(A) dismissed the contentions of the assessee by holding that “5.0 Appellate findings: I have carefully examined the facts of the case, assessment order passed by the AO, submission/reply along with documentary evidence filed by the appellant during the appellate proceedings and material available on record.

1 Grounds of appeal No. 1, 6 & 7: Vide these grounds of appeal, the appellant has raised very general and vague grounds without any specific issue containing therein. Since these grounds are general and vague in nature, therefore there is no need to give separate adjudication on these grounds.

2 Grounds of appeal No. 2, 3, 4 & 5: Vide these grounds of appeal the appellant has challenged the addition of Rs. 50,96,667/- passed by AO by applying the provision of section 56(2)(vii)(b). The appellant has stated that AO was not justified on relying on the valuation report of the Department Valuer (DVO) of the land which is lease hold and is not subject to provision of section 56(2)(vii)(b). Further the appellant has stated that the AO has wrongly applied the provision which has come into force from 01.04.2014, whereas land in the question was purchased in the year 2013. 5.3 I have duly considered the facts of the case, the issue raised by appellant vide these grounds of appeal, the findings of the AO in his assessment order on the issue of addition of Rs. 50,96,667/- and reply given by appellant during the appellate proceedings. From the perusal of assessment order, it is seen that the appellant had purchased along with two persons a piece of land at Kalyan bearing survey no. 89 vide registration document no 5927/2014 dated 28.08.2014 for the consideration of Rs. 10000000/- against the market value assessed at Rs. 6.87.49,000/- during the year under consideration. The AO noted that this transactions attracted the provision of section 56(2)(vii)(b) of IT Act and accordingly sought explanation for such discrepancies during the assessment proceeding. Since appellant had raised dispute against considering the market value of the immovable property. The AO referred the matter to the DVO (u/s 142A(1)) for arriving at the correct market value of the immovable property. On receipt of the DVO report, it was noticed that the DVO has assessed the market value of the land purchased by the appellant at Rs. 2,52,90,000/-against the actual purchase value of Rs. 10000000/-. In the light of the DVO report the AO has invoked the provision of sec. 56(2)(vii)(b) and has brought under tax 1/3rd share in the purchased land of the appellant which worked out to Rs. 50.96,667/-

4. The appellant has vehemently opposed the findings of the AO with regard to invocation of section 56(2)(vii)(b) and resultant addition of Rs. 50,96,667/- in his reply as seen from his submission as appearing in paragraph 4 above. From the reply, it is seen that appellant has prominently raised the issue that the purchased land is lease hold land which is not owned by the appellant. The market value of the land is actually Rs. 10000000/- as against Rs 2,52,90,000/- as assessed by the DVO. The appellant has argued that the DVO is not aware of the fact that land is lease hold and not the freehold land. Further he has not arrived correct valuation of the land based on the real situation on the ground. Similarly appellant has also argued that the invocation of sec. 56(2)(vii)(b) is not applicable for the year under consideration since land was purchased in 2014. The appellant has objected that DVO report on the ground that the assessment is excessive and not based on the real and ground situation. The appellant has also filed a report from his advocate with regard to valuation of land in support of his claim

5: I have duly considered the findings of the AD on the issue of addition u/s 56(2)(vii)(b) and reply of the appellant filed during appellate proceeding in support of his contention. From the careful analysis of the above facts, it is seen that AO has made due diligence with respect to assessment/ valuation of immovable property. The stamp valuation of the land Rs.6,67,49,000/- as evident from the registered documents. However, on objection received from the appellant, the AD had referred the matter to an expert (DVO) who is well qualified and authorised to assess the true valuation of the immovable property. has assessed the market value of the land at Rs. 2.52.00.000 From the perusal of DVO report itself is evident that he was well aware of the nature and the character of land in question Therefore the valuation of the land by the DVO can't be questioned in my considered opinion, the assessment of the purchased land has been done correctly by the DVO. Hence the action of the AD by invoking section 56(2)(vii)(h) is valid and correct in view of the factual matrix of the present case. In The light of above discussion I am inclined to concur with the findings of AO in his assessment order with regard to addition of its 50.96.6671- made u/s 56(2)(vii)(b). Accordingly hereby sustain the addition of Rs. 50.96.667-made by AO in his assessment order. Therefore these Grounds of appeal are dismissed.”

The assessee is in appeal before us against the order of the CIT(A). There is a delay of 411 days in filing the appeal before us. The ld. AR in this regard filed a petition for condonation of delay along with affidavit from the assessee. The primary reason as stated by the assessee for the delay is that the assessee has not received any notices with regard to the appellate proceedings post 24.12.2020 and that the assessee has not received the order of the CIT(A) dated 16.10.2023 which is passed without issuing any notice of hearing. It is also stated in the affidavit that the assessee's representative has been appearing before the CIT(A) during manual proceedings and that the assessee has responded to the last of the notices post migration of the appeal to NFAC. It is also stated that only when the tax consultant visited the ITBA portal it is noticed that the CIT(A) has passed the order and thus it came to the knowledge of the assessee. Accordingly, the ld AR prayed that the delay be condoned since the delay in filing the appeal is not intentional and there is a reasonable cause.

The ld. DR on the other hand vehemently opposed the condonation and argued that the assessee has been responding to the notices and has filed the details before the CIT(A). The ld. DR further argued that the assessee is very much aware of the appellate proceedings and therefore the contention that the assessee is not aware of CIT(A) passing the order cannot be accepted. The ld. DR accordingly submitted that the delay may not be condoned.

We heard the parties and perused the material on record. We notice that the Hon'ble Supreme Court while considering the issue of condoning the delay in filing the appeal in the case of Collector, Land Acquisition v. Mst. Katiji and Ors. (167 ITR 471) has laid certain principles and one of the said principles is that there is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides and that a litigant does not stand to benefit by resorting to delay but in fact, runs a serious risk. The Apex Court further held that it must be grasped that the judiciary is respected not on account of its power to legalise injustice on technical grounds but because it is capable of removing injustice and is expected to do so. In the background of this legal principle as laid down by the Hon'ble Supreme Court when we examine the issue in assessee's case we notice that the assessee has been appearing and submitting the details before the CIT(A), till March 2020, has no valid reason not to continue to appear except for the reason as stated in the affidavit that no further notice was received. During the course of hearing the ld DR could not refute with any evidence the claim of the ld AR that the appellate order which is passed 2 years after the last of the notices was not received by the assessee. Considering these facts and circumstances in our considered view there is merit in the submission of the ld AR that the delay in filing the appeal is not deliberate and that there is no culpable negligence on the part of the assessee. Hence respectfully following the above decision of the Apex Court we condone the delay of 411 days in filing the appeal before us and admit the appeal for further adjudication. 7. On merits, the ld. AR during the course of hearing primarily made submissions with regard to the valuation of the DVO being not correct. In this regard the ld. AR submitted that the impugned land consisting of 2 plots is under lease for 50 & 75 years on which the lessee has constructed a school. The ld. AR further submitted that the original owner was suffering from cancer and therefore made a distress sale to the assessee and two others for a consideration of Rs. 1,00,00,000/- and that the assessee has not obtained the possession of the land. The ld AR argued that the DVO while making the valuation has not considered these facts. Further the ld. AR drew our attention to the valuation report of the DVO (page 31 of Paper Book) to submit that the sale instances of four properties considered by the DVO are not the correct comparable. In support of the said contention, the ld. AR submitted that the plot area in the sale instances are much smaller as compared to the area of the impugned property and that area of the land has significant impact on the price which is a key factor ignored by the DVO. The ld. AR further argued that two of the sale instances pertain to sale of TDR and not sale of land and that one of the sale instances pertain to a free-hold land. Therefore it is argued by the ld AR that the very basis on which the DVO has arrived at the valuation is not correct. The ld. AR submitted a Paper Book containing additional evidence substantiating that the sale instances considered by the DVO are not the correct comparables. The ld. AR drew our attention to the relevant observations of DVO where the value per sqm is arrived at Rs.4998 to submit that the details of how that said rate is at is not clearly stated except the general observation that various factors have been taken into consideration. Therefore, the ld. AR argued that the valuation done by the DVO is flawed and cannot be considered as a basis of making addition under section 56(2)(vii)(b) of the Act. The ld AR further submitted that the additional evidences now submitted include the interim injunction given by the Hon'ble Bombay High Court in favour of the lessee with regard to the possession of the impugned land. The ld. AR also submitted the death certificate and the medical report are also submitted as additional evidence in order to support the claim that the sale made by the original owner is a distress sale. The ld AR argued that the additional evidences go to the root of the issue contented in the appeal i.e. the DVO's valuation being incorrect and accordingly prayed for the admission of the same.

The ld DR on the hand furnished a detailed written submission countering the argument with regard to the DVO's valuation report. The relevant parts of the written submissions are as extracted below”

We heard the parties and perused the material on record. For the purpose of adjudication, we will only consider the issue of DVO's valuation not being correct. To recapitulate the facts, the assessee along with two other persons purchased a land containing 2 plots which is under lease for 50/75 years for a consideration of Rs.1,00,00,000/-. Since the stamp duty was much higher, the AO issued a show cause notice as to why the provisions of section 56(2)(vii)(b) should not be applied. The assessee objected to the stamp duty value considered by the AO stating that the owner has made a distress sale and that the assessee has not obtained the possession of the land due to the fact that the lessee who has built a school on the impugned land has filed case in the Hon'ble High Court against handing over the possession. The assessee accordingly requested the AO to refer the valuation of the land to DVO. The assessee submitted all the relevant details before the DVO and the DVO gave the repost arriving at the valuation at Rs. Rs. 2,52,19,000/-. The AO accordingly made the addition under section 56(2)(vii)(b) to the extent of assessee's share. The contentions of the assessee with regard to the valuation report is two fold. One the sale instances considered are not the correct comparables and the second that the DVO has not given proper discount towards the property being encumbered. In support of the first contention the ld AR submitted additional evidences containing the sale deed of the instances considered by the AO. Since the additional evidences now produced goes to the root of the issue of sale instances considered by cause, the additional evidence is admitted and taken on record. The reasons as submitted by the ld AR for the sale instances considered are not correct comparables are that – a) The land size in the sale instances is much smaller than the size of the impugned land that the size of the land impacts the rate per sqm. b) Two of the sale instances are sale of TDR and not land c) One of the sale instances is a free hold land and not lease hold as in assessee's case d) In one of the sale instances the encumbrance is of different nature

From the preliminary review of the additional evidences, we notice that there is merit in the contentions of the ld AR regarding the facts pertaining to the lands. Further in our view the following observations of the Hon'ble Supreme Court while considering an appeal under Land Acquisition in the case of Manilal Shamalbhai Patel vs Officer on Duty (Land acquisition) & Anr, are relevant while considering the first of the above contentions – "12.It is also a settled principle of law that large areas do not attract the same price as is offered for the small plats of lands. Therefore some amount of deduction is also normally permissible on account of largeness in area. This deduction of at least 10% has to be applied to determine the rate of compensation."

Further on perusal of the DVO's report we notice that the basis on which the DVO has arrived at the valuation of Rs.4998 per sqm is not coming out clearly. The relevant part of the DVO's report in this regard is extracted below – 12. In this regard it is pertinent to take note of the following observations of the coordinate bench in the case of Wenceslaus Jseph D'Souza vs ITO (ITA No.4732/Mum/2017 dated 26.12.2019) – “8. We find that fact that the land had serious encumbrances is not an even in dispute. The land in question was all along occupied and possessed by M/s. Haldyan Glass Ltd. which incidentally is a confirming party in the sale deed. As the matter of fact at page 2 sale deed specifically notes this possession as follows:-

As evident from the above observation in the sale deed, not only the property in question was in possession of a third party, it also did not have any direct access from the public road and the access thereto was only through a property which the end buyer had already purchased. Given these serious restrictions on the right of the seller, which are also fully recognized in the DVO’s report, the stamp duty valuation report can indeed not be adopted as a fair market price in this case. The DVO himself has given a discount of 50% on account of deem and these encumbrances. In annexure 2A of the DVO report, it is specifically stated that “as the same encumbrances were prevailing hence similar discount at the rate of 50% is considered reasonable as on 20.08.2010”. In annexure 2 these encumbrances are described as “1. the property was land locked and located in the interior side from the main road, 2. The plot is irregular in size and tapering in shape, 3. The plot was not is possession of the Assessee etc. hence on the facts an circumstances of the case cumulative discount of 50% is considered reasonable for deduction on account of the above encumbrances”. The short question before us is whether in these circumstances, there is any good reasons reject valuation of Rs. 50 lac on which the sale deed as entered into and adopt 50% of the fair market value as deem sale consolation. In our humble understanding there is no basis whatsoever for adoption of 50% of the fair market value as deed sales consideration, and this deemed sale consideration is purely based on the estimation. in consideration of parting with the legal title over said property. The entire basis of valuation of evaluation adopted by the DVO is devoid of any legally sustainable foundation in as much as there is nothing sacrosanct about discounting at the rate of 50% for arriving at fair market value. Given these peculiar facts of the case the sale consideration on which the transaction is actually taken place should be accepted, being an arms length transaction on these peculiar facts, as the fair market value of the said property as on the date of the transaction. In view of these discussions bearing in mind entirety of the case we deem it fit and proper to direct the Assessing Officer to adopt the deed sale consideration at Rs. 50 lac and compute in long term capital gains on that basis. Order accordingly. Ground no 1 and 2 are thus allowed in the terms indicated above.”

From above observations of the coordinate bench it is clear that for the purpose of valuation it is necessary to consider the nature of restrictions to the rights of the seller i.e. land being under lease with a structure on it and the access restrictions of the purchaser such as assessee not being in possession of the land are critical factors. Further the discounting to be applied for the encumbrances also needs to have a valid basis and that the same cannot be done as estimation. As already stated from the perusal of the above extracted valuation report, we are unable to appreciate the basis on which the DVO has arrived at the value of Rs.4998 per sqm., though it has been mentioned that adjustments towards, time lag, location shape size litigation etc., has been made. Having said so we also are not inclined to hold that the purchase price paid by the assessee as correct value of the land for the reason that there is no valid basis except the fact that the seller has made a distress sale inspite of the stamp duty value being high. To that limited extent we agree with the contention of the ld DR that the valuation submitted by the assessee cannot override the statutory DVO's report. In view of these discussions we are of the view that the valuation of the property needs to be revisited by the DVO given that the additional evidences are now submitted by the assessee. Accordingly we remit the the assessee. The AO is further directed to call for any further details / evidences from the assessee as may be required. The assessee is directed to provide the required relevant information and documents as may be called for and cooperate with the proceedings. It is ordered accordingly.

During the course of hearing, the ld AR did not present any argument with regard to the grounds contending the applicability of section 56(2)(vii)(b) to lease hold land and that property being acquired prior to insertion of section 56(2)(vii)(b) in the Act. Hence these grounds are not adjudicated and left open.

In result, appeal of the assessee is allowed for statistical purposes.